Although in the practice of Costaș, Negru & Asociații, expropriation operations have presented a predominant interest in the urban and administrative fields, we believe that it is also worth drawing attention to the tax treatment in the case of compensation received during expropriation.
Expropriation is a form of forced transfer of private property rights for the purpose of carrying out public works clearly defined by Law No. 255/2010. Due to the forced nature of the transfer of property, this operation can only be carried out on the basis of fair and prior compensation offered to the owners of the properties that will be included in the so-called “expropriation corridor.” And considering that this compensation represents an accounting gain for the persons affected by the expropriation operations, it is worth examining the tax treatment of this compensation.
Of course, in order to determine to what extent a category of income is taxable or not, it is necessary to examine the provisions of Article 23 of the Tax Code. As a preliminary matter, according to Article 23(m) of the Tax Code, the Romanian legislator exempts from the category of taxable income only the category of compensation awarded on the basis of judgments handed down by the European Court of Human Rights. In the case of compensation received as a result of expropriation, we consider that the tax regime provided for in Article 23(m) of the Tax Code cannot be applied by analogy, even though both amounts have a common purpose, namely to compensate for damage.At first glance, the compensation awarded could be equivalent, from a tax perspective to an increase in the value of a fixed asset. Thus, the provisions of Article 23(g) of the Tax Code could become applicable, which expressly provide that the following income “representing increases in value resulting from the revaluation of fixed assets, land, intangible assets, and intangible property” is not taxable. However, in order for this category of income to be reclassified as non-taxable, it is essential that the surplus value results from the periodic evaluation ordered at the time of the revaluation, in the case of payment of taxation on buildings, in accordance with Article 460(6) of the Tax Code. However, an adjustment made by a court of law in the context of an expropriation operation is not equivalent to a genuine revaluation within the meaning of Article 460(6) of the Tax Code. Similarly, in this case, we cannot apply by analogy the tax regime expressly provided for in Article 23 of the Tax Code. This conclusion is also supported by the provisions of Article 22(1) of Law No. 255/2010 on expropriation for reasons of public utility, which expressly stipulate that challenges to the compensation offered by the expropriator shall not be subject to the provisions of Article 23 of the Tax Code. 255/2010 on expropriation for public use, which expressly stipulate that challenges to the compensation offered by the expropriator shall not have suspensive effect on the decisions establishing the amount of compensation, nor on the transfer of ownership generated by the expropriation. In such situations, the purpose of the challenge is rather to ensure fair compensation for the expropriated person than to attract a more favorable tax regime.
Therefore, as long as this category of income is not expressly exempt from tax, these amounts, which will be shown as an increase in the taxpayer’s assets, may be considered taxable income.
At the same time, given the nature of the transaction itself, the transfer of an asset from the patrimony of a taxable person (the expropriated person) in exchange for a sum of money to public ownership, even if it is treated as compensation, constitutes a supply of goods pursuant to Article 270(3)(c) of the Tax Code. Therefore, in relation to the VAT system, the compensation is understood to be the consideration for this supply of goods, assimilated to the price paid by the purchaser in a classic transaction. Therefore, in relation to the VAT system, the compensation is regarded as the consideration for this supply of goods, assimilated to the price paid by the buyer in a classic sale and purchase transaction of real estate. The Court of Justice of the European Union has also ruled on this issue in case C-182/23, finding it irrelevant that this transaction is of an occasional nature and that this transfer was enforced following an order by the public authority. As long as the transfer of ownership involved an asset belonging to the legal person in exchange for corresponding compensation, the economic operator’s field of activity is irrelevant. Even if a surplus of compensation over the initial amount owed to the expropriated company were to be established, it would be subject to the same tax regime, given that it would be based on the same taxable transaction, namely the supply of immovable property. Of course, it will not be relevant whether the expropriation was carried out in relation to a natural person or a legal person, as the transaction still constitutes a supply of goods within the meaning of Article 270(3)(c) of the Tax Code. In conclusion, the amounts obtained as compensation will be subject to VAT.
Although these amounts are subject to VAT and we are talking about a supply of immovable property, we consider that the mechanism provided for in Article 331 of the Tax Code regarding reverse taxation will be difficult to apply. At least in principle, according to Article 331(2)(g) of the Tax Code, supplies of buildings, parts of buildings, and land of any kind are typical transactions to which the reverse charge mechanism will apply. Given that Article 331(2)(g) of the Tax Code does not provide a clear definition of how these buildings should be supplied, in consideration of Article 270(3)(c) of the Tax Code, the same analogy must be applied, in the sense that obtaining compensation following the expropriation of a property may also constitute a transaction to which we can apply the reverse charge mechanism.
However, we draw attention to the fact that in order to apply the reverse charge mechanism, both parties to the transaction must be registered for VAT purposes. Therefore, if the administrative authority, which is the beneficiary of the expropriation and which provides the compensation, is not registered for VAT purposes, the reverse charge mechanism cannot be applied.
At the same time, it is necessary to examine the obligation to apply VAT in relation to the category of land subject to expropriation. As a rule, Article 292(2)(f) of the Tax Code clearly states that the supply of buildings or parts of buildings and the land on which they are built, as well as other land, is exempt from VAT, noting that the exemption shall not apply to the supply of new buildings, parts of new buildings or building land. Although the text of the law does not expressly mention it, we can infer that if the exemption does not apply to the supply of buildable land, a contrario, the exemption is applicable to non-buildable land.
The Tax Code does not provide a definition of the concept of non-buildable land, and the provisions of point 53(6) of G.D. no. 1/2016 approving the Methodological Norms for the application of Law No. 227/2015 on the Tax Code are instructive in this regard: “In applying Article 292(2)(f) of the Tax Code, the classification of land as buildable land or land for other purposes at the time of its sale by the owner is determined by the urban planning certificate.” Therefore, to the extent that the legal status of the property is classified as “non-buildable” in the urban planning certificate, the transaction involving the delivery of such land is also exempt from VAT in accordance with the provisions of Article 297(2)(f) of the Tax Code.
However, we note that the urban planning certificate is also indirectly conditioned by the existence of building regulations adopted at the level of administrative-territorial units, which are subject to Law No. 350/2001 on land use and urban planning. According to Article 311 (1) of Law No. 350/2001: “The right to build is granted in accordance with the legal provisions, in compliance with the urban planning documentation and related local urban planning regulations, approved in accordance with this law.” The Zonal Urban Plan is the urban planning instrument through which the integrated urban development of certain areas of the locality is coordinated, establishing regulations regarding the building regime, the function of the area, the maximum permitted height, land use coefficient (LUC), land occupancy percentage (LOP), building setbacks from the alignment and distances from the side and rear boundaries of the plot, architectural characteristics of buildings, and permitted materials.
In this context, given the frequent changes in urban planning regulations, it is worth analyzing to what extent we can classify a plot of land as buildable (and therefore exempt or not exempt from VAT), to the extent that urban planning regulations are amended. In a situation where a plot of land is classified as “buildable” in the urban planning certificate, but at the time of offering compensation by the expropriator, local urban planning regulations have undergone changes, making the urban planning certificate no longer compatible with the latter, we consider that in reality we cannot speak of a buildable plot of land. Thus, regardless of the statement in the urban planning certificate, we consider that the concept of “buildable”/”unbuildable” must be subject to a factual analysis, based on the actual possibility of building on a particular plot of land.
This is all the more so given that, in expropriation proceedings, building prohibitions may often arise even before the decision establishing compensation is issued. In accordance with the provisions of Article 13(1) (1) of Law No. 255/2010, after registering the cadastral documentation for the expropriation operation, ANCPI, through its territorial units, is responsible for communicating, based on this documentation, the list of proposed and rejected properties located on the expropriation corridor. Once this list has been submitted, the competent authorities are prohibited from issuing any opinion, agreement, permit, or authorization regarding the properties subject to expropriation, as the properties are thus rendered unavailable. In addition, any such notices, authorizations, and permits issued are null and void pursuant to Art. 30(1) of Law No. 255/2010. Moreover, in accordance with the provisions of Article 13(2), if within two years from the date of transmission of this list to the administrative-territorial units, approval for the initiation of the expropriation procedure is not obtained, then all these prohibitions shall be automatically removed. According to Article 5(1) of Law No. 255/2010, in order to carry out these public utility works, the expropriator is responsible for obtaining the approval of the indicators for the public utility works to be carried out, based on the relevant technical and economic documentation, the location of the works, the list of owners subject to expropriation, but also the estimated amounts of compensation, as well as the method of financing. Furthermore, Article 7(1) of this normative act expressly stipulates that only after the approval of the technical and economic indicators, the urban planning and land use documentation, or the topographical and cadastral documentation will the amounts of compensation available to the owners be recorded. Corroborating these articles, it appears that even if the ownership of the property subject to expropriation is transferred upon the issuance of the expropriation decision and the approval of the decision establishing the compensation, in reality there are a number of constraints that effectively change the legal status of a property to non-buildable. This change is effective because the owner of the property will not be able to apply for any building permits for the property, even if it was previously buildable.
Therefore, even if according to point 53 paragraph (6) of G.D. no. 1/2016 for the approval of the Methodological Norms for the application of Law no. 227/2015 on the Fiscal Code, the legal regime of the property is determined by the mention in the urban planning certificate, considering art. 292 (2) (f) point 1 of the Tax Code, a land will be regarded as buildable in accordace with the provisions in force. And, in accordance with the provisions of Law No. 255/2010, a property is subject to building restrictions even before the decision establishing compensation is approved.
In this regard, it becomes difficult to estimate the legal status of a property in the context of expropriation operations, especially since the Methodological Norms condition the building regime of the property on the information contained in the urban planning certificate. However, the factual reality cannot be fully captured by a single statement contained in this certificate, especially given the frequent changes in urban planning regulations.
This article was prepared for the civil society blog of Costaș, Negru & Asociații law firm by Diana Hoha Pop, attorney at law in the Arad Bar Association.
Costaș, Negru & Asociații is a civil law firm with offices in Cluj-Napoca, Bucharest, and Arad, which provides assistance, legal representation, and consulting in several areas of practice through a team of 16 lawyers and consultants. Details regarding legal services and team composition can be found on the website https://www.costas-negru.ro .
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